Harris parent plans to double U.S. branches

November 29, 2005|By Bloomberg News

TORONTO — The Bank of Montreal said Monday that it has spent the past year searching for U.S. acquisitions to halt a profit slump at its Chicago-based Harris Bank subsidiary, and that it plans to double the number of Harris branches in the U.S. to 400 in the next five years.

None of the big lenders the bank courted wanted to be bought by Canada's fifth-largest bank.

"It's one thing to want to be an acquirer, but you have to find a willing partner," Chief Executive Anthony Comper said Monday at the company's Toronto headquarters.

Comper has earmarked $2 billion for acquisitions. While Bank of Montreal could use the cash to buy back stock or boost its dividend, Comper said his priority is to increase lending to small and medium-size businesses.

"In order to grow the U.S. business, they have to make an acquisition," said Shaun Arnold, a money manager at Highstreet Asset Management in London, Ontario.

Profit at Harris Bank fell 55 percent in the fiscal third quarter, to $72.7 million, as the bank lost market share in Chicago. Bank of Montreal reports fourth-quarter earnings Tuesday.

Bank of Montreal bought Harris in 1984 for about $615 million and since has spent nearly $3 billion increasing its network in the Chicago area to 197 branches from 15.

Harris said it currently does business in Indiana and Illinois but hopes to expand within an eight-state region over the next five years to as many as 400 branches.

Chicago is one of the most competitive banking markets in the U.S., making it harder for Harris to expand.

As recently as the third quarter of 2004, the U.S. accounted for 30 percent of Bank of Montreal's earnings. By the third quarter of this year, however, Bank of Montreal's U.S. operations were providing 16 percent of the company's profit.

Harris has "taken a deliberate and methodical approach to expansion, and we are positioned to step up the pace of acquisitions," Harris Bank CEO Frank Techar said at an investor conference this month.

"Pressure from increased costs associated with governance and regulatory compliance and a credit cycle turn may force smaller players to consider their options," Techar said.

The top three lenders in Chicago control 38 percent of deposits, compared with the 47 percent held by the three biggest banks in New York. Harris ranks No. 3 by deposits, trailing JPMorgan Chase & Co. and LaSalle Bank, a unit of Amsterdam-based ABN Amro Holding NV, according to SNL Datasource.

JPMorgan gained 350 Illinois locations in last year's acquisition of Bank One Corp. and plans to open 15 to 20 more in the Chicago area next year.

Fifth Third Bancorp, based in Cincinnati, has doubled the size of its Chicago business in three years, to 140 branches, and will add as many as 20 next year, said Terry Zink, the bank's CEO for the city.

"When you see all the branches that everyone's putting up, you can see how everyone's trying to get the business," said Joseph Gregoire, Cleveland-based National City Corp.'s CEO in Chicago.

Comper's plan to expand Harris by acquisition stumbled as share prices of banks rose. The median price-to-book value of U.S. banks and thrifts is the highest since 1998, according to a study by Sandler O' Neill & Partners LP.

Suitable options have been "a little bit tougher to find," said Comper.

"They're getting a much lower return on the capital dedicated to the U.S. businesses compared to Canadian businesses," Alex Zivic of CI Fund Management Inc.'s Signature Group in Toronto said of the Bank of Montreal.

"They do have a quality bank down there, but it doesn't achieve really attractive returns."